I haven’t met you in this blog for a while. I missed our blog readers! I would like to say sorry for my absence over the past few weeks. Please do not blame me too much, as I am back today with an intereting post. Ok, let us begin with the graph below showing the changes in world oil prices.
As you can see from the above, the world oil price, despite a prolonged economic recession, has been increasing since June. In other words, the price is not lowered even though petroleum is less used these days. Then, why is petroleum less demanded than before? Due to the current economic recession, many businesses have difficulties running their plants. Some are shortening the hours of plant operation.
If so, how come is the oil price still increasing with decreasing demand for oil? Well, before directly jumping into the answer, let us briefly analyze ‘price determinants’ first. I would like to tell you what price determinents are and how they are chaging.
Well, at a first thought, we think supply and the demand are the key determinants for price. The demand for petroleum is clearly on a downward trend, as mentioned above. In general, its demand is proportionate to economic situation. Statiscally, when economic growth is up by roughly one percent, demand for petroleum increases by 0.39 percent. If it is little bit difficult to understand, let us think of a simple case scenario. Just assume that there are manufacturing businesses. They will certainly demand fossil fuels like oil for their production. So, what if those businnesses experience eocnomic downturn? They will manafacture less, and hence demand for oil will be natually decreased.
In regard to this phenomenon, the SERI economic report, one of the prominent reports in Korea, said, ‘the demand for oil has only recorded one percent growth rate in 2011 and 2012. This unwanted tendency is expected to go on in 2013.’ This reflects the current downward trends in our economy.
Are you following me now? So, we now understand the demand side. Then, what about the supply? Normally, we assume that the amount of oil deposits is not enough. However, our assumption is not accurate, as the world’s oil reserves are actually growing more than ever. A figure says that the increase in oil reserves was by 2.8 percent over the last year. How can this be possible? Oil rich countires in the Middle East, like Saudi Arabia, remarkably increased their oil production. Not only that, the US developed a new technology to excavate oil deposits barried under the sea. As a result, oil supply is expeted to rise by 6.8 percent from 2012 to 2013. For a clearer understaindg, please look at the graph above illustrating the expected increase in oil reserves. This is quite surprising figure departing from what we have expected so far.
Now, you might wonder why the petroleum is still so expensive. We can find the answer from a geographical factor. As you have seen and heard from news, the Middle East is one of the areas where the US and European countries place lots of economic sanctions. Also, outbreaks of civil wars are often in the area. These risks in the Middle East cannot make the oil price stable. Making this situation worse, some governements in the area buy oil reserves on purpose for speculation.
This might be a story far away from our home, but why are we so concerned? We really need to consider how it influences over our economy. Well, you might already know that it definitely brings negative effects on the oil price which natuarally leads to a constant economic recession. So what can we do now? Since the most turbulent reason is based on geographic factors, we cannot stop them directly. For now, we should monitor every situation in more detaila and react carefully. From now on, whenever you see articles or news about conflicts in the Middle East, start thinking about how it would be related to oil prices and our economy. Wouldn’t it be a nice start?
If you have further questions, just leave comments 😀 See you next time!